‘…the financial processes to resolve and restructure these debts are fraying. During the second half of the 20th century, the western world organised restructurings of poor-country debt by using the “Paris Club” framework. This enabled creditor nations to cut deals backed up by institutions such as the IMF and the “London Club” of commercial lenders. Such a western-centric approach no longer works. A startling IMF chart shows why: a decade ago, low-income countries had about $80bn of public external bilateral debt (excluding multilateral and private loans). Two-thirds emanated from Paris Club lenders. Today, these debts top $200bn, and under one-third is lent by the Paris Club. The rest is mostly owed to China…’ – Excerpt from a recent Financial Times (FT) published article ‘Argentina’s IMF deal offers warning on emerging market debt’ by Gillian Tett
The above clearly indicates that the framework of debt relief/restructure by bilateral countries of the Paris Club mainly is not of any significant use given the higher proportion of debt owed to China, and private creditors, as against the situation around a decade ago. For instance, a December 2, 2021 An International Monetary Fund (IMF) published article ‘The G20 common framework for debt treatments must be stepped up’ highlights this evolution of composition of debt of low-income countries, from where the ‘IMF chart’ has been referred from in the excerpt above.
As per the article, there is an urgent need to reform the G20 Debt Service Suspension Initiative (DSSI), whereby it indicated ‘Recent experiences of Chad, Ethiopia, and Zambia show that the Common Framework for debt treatments beyond the DSSI must be improved. Quick action is needed to build confidence in the framework and provide a road map for helping other countries facing increasing debt vulnerabilities. …The G20 put in place the DSSI to temporarily pause official debt payments to the poorest countries, followed by the Common Framework to help these countries restructure their debt and deal with insolvency and protracted liquidity problems.’
With regard to the shortcomings of the Common Framework, an April 12, 2021 Project Syndicate (PS) published article ‘The G20’s missed opportunity’ pointed out as follows: ‘…the new Framework applies only to low-income countries. Many of these countries do indeed need relief, but so do highly indebted middle-income countries that have been hit hard by the pandemic. …Moreover, the Framework deals with countries’ debt problems on a case-by-case basis, and thus fails to address the problem of lasting stigmatization of any country that avails itself of relief. …Finally, the Framework lacks a commitment by creditors and debtor countries alike to align newfound fiscal space with globally agreed climate and development goals.’
The challenge of debt for developing countries is increasing rapidly given the rising oil prices, increasing import bills significantly in many net-oil-importing developing countries like Pakistan, and monetary tightening increasing the already high burden of debt servicing. It is therefore important that on one hand, rich, advanced countries should provide greater debt relief/moratorium to developing countries, and on the other, the debt restructuring framework is reformed appropriately to allow for providing debt relief/restructuring properly.
Hence, it is essential to reform the Common Framework, and some of the initiatives in this regard as pointed out in the same IMF published article are (a) bringing ‘greater clarity on the different steps and timelines in the Common Framework’, (b) introducing ‘a comprehensive and sustained debt service payment standstill for the duration of the negotiation… as well as incentivize faster procedures to get to the actual debt restructuring’, (c) to ‘clarify further how the comparability of treatment will be effectively enforced, including as needed through implementation of the IMF arrears policies, and (d) expanding the Common Framework ‘to other highly-indebted countries that can benefit from creditor coordination’.
A recent report by the Sovereign Debt Working Group of the Bretton Woods Committee titled ‘Debt Transparency: the essential starting point for successful reform’ aims to ‘(1) to examine the shortcomings of the current regime and (2) to lay out a road map regarding how to effect the needed changes in the international architecture for sovereign finance.’ The same article by Gillian Tett highlighted the policy prescription of this report as follows: ‘The Bretton Woods report argues that one crucial step would be for governments to create a unified, transparent database of their debts. It calls on rating agencies, multilateral banks and investors with environmental and social governance mandates to lobby for this. It also argues that the old Paris Club framework should be overhauled to give China a proper seat at the table. Finally, it calls for private sector lenders to be incorporated into negotiations at a much earlier stage.’
The challenge of debt for developing countries is increasing rapidly given the rising oil prices, increasing import bills significantly in many net-oil-importing developing countries like Pakistan, and monetary tightening increasing the already high burden of debt servicing. It is therefore important that on one hand, rich, advanced countries should provide greater debt relief/moratorium to developing countries, and on the other, the debt restructuring framework is reformed appropriately to allow for providing debt relief/restructuring properly.
